A long-run risks explanation of predictability puzzles in bond and currency markets

Published

Journal Article

We show that bond risk premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with timevarying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets. © 2012 The Author.

Full Text

Duke Authors

Cited Authors

  • Bansal, R; Shaliastovich, I

Published Date

  • January 1, 2013

Published In

Volume / Issue

  • 26 / 1

Start / End Page

  • 1 - 33

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhs108

Citation Source

  • Scopus